Jay Clayton

Securities and Exchange Commission Chairman Jay Clayton wants to reopen an inquiry into the entire shareholder proxy process, including questions like “What are the costs and burdens of the proxy system on companies” as well as on shareholders, he says in the text of a presentation issued on Wednesday.

Jay Clayton

Jay Clayton

“Given the core role of the proxy process in public company governance, I believe the commission should be ‘lifting the hood’ and taking a hard look at whether the needs of shareholders and companies are being met,” Clayton says in remarks prepared for delivery at the Practicing Law Institute’s annual conference on securities regulation.

Specifically, Clayton is calling on the commission to renew efforts to overhaul the proxy system begun under then-commissioner Mary Schapiro in 2010 with its “proxy plumbing” concept release. The release was called that because its purpose was to look closely at all aspects of the system.

“I believe the commission should consider reopening the comment file on the 2010 ‘proxy plumbing’ concept release to solicit updated feedback from market participants about what works and what does not work in our proxy system,” Clayton says.

While shareholder proposals can lead to corporate governance changes that align more closely with the long-term interests of Main Street investors, they “also create costs, including out-of-pocket costs and the use of board and management time that otherwise could be devoted to operation of the company itself,” according to the commissioner.

On the issue of proxy ballot proposals, Clayton seems to want to pay as much attention to corporate prerogatives as he does to shareholder demands. Although some think that companies should focus on shareholder engagement, others “want management to dedicate as much time as possible to company operations for the benefit of all shareholders,” he says.  

“The shareholder proposal process is not the only piece of this puzzle, but it is a piece worth examining,” Clayton adds.

The commissioner also says that questions still exist about what level of ownership should be required to submit shareholder proposals, “as well as whether our current resubmission thresholds are too low.”

The worry, he says, “is that the thresholds allow proposals that shareholders previously rejected to be repeatedly resubmitted even though they receive a small fraction of shareholder support.”  

One of Clayton’s “guiding principles” is that the SEC must take into account whether its regulations “are serving the long-term interests of Main Street investors. We need to make sure that those investors have a seat at the table as we examine the proxy process.”

More broadly, Clayton says that he  increasingly worries “that the voices of long-term retail investors may be underrepresented or selectively represented in corporate governance.”  

For instance, he notes, the SEC staff estimates that more than 66% of Russell 1000 companies are owned by Main Street investors, “either directly or indirectly through mutual funds, pension or other employer-sponsored funds, or accounts with investment advisers.”

Yet it’s unclear whether the the views of Main Street investors “are being advocated fully and clearly, either by individual investors or groups that represent them,” according to the commissioner.  

Most of Main Street’s investments are in vehicles in which people  “with their money at risk” are not the voting shareholders, Clayton says, noting that voting power rests with investment advisers. “A question I have is: Are voting decisions maximizing the funds’ value for those shareholders?”

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